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Exchange Rate, Trade and Macroeconomic Stabilization: Evidence from Nigeria

IJED, Vol. 11 No. 1, (2017)

Stability in exchange rate in the absence of undue vacillations and sound trade policy are essential for macroeconomic stabilization. This paper examines the nexus between exchange rate, international competitiveness and macroeconomic stabilization in Nigeria. This is examined over the period, 1981-2015. Employing cointegration and dynamic error correction modelling techniques, the findings show that exchange rate and trade policy are critical stabilization policy variables. In particular, the results, using Nigerian data, show that rising exchange rate, inflation and interest rate renders macroeconomic stabilization intractably difficult. The other variables- trade and investment are found to have significant positive effects on countercyclical stabilization in Nigeria. Therefore, sound and stable macroeconomic policies needs to be put in place in Nigeria. Importantly, it needs to be supported with good trade and investment policies, along with relevant institutional structures.

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